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UNITED STATES SECURITIES AND EXCHANGE COMMISSION     FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2004 or (   ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from  to Commission File Number 0-30539 TVIA, INC.  Delaware
    
    77-0549628(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    identification number)
 4001 Burton Drive, Santa Clara, California 95054
(Address of Principal Executive Offices) (Zip Code) Registrants telephone number, including area code: (408) 982-8588   Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No (   ) On July 31, 2004, 22,723,350 shares of the Registrants Common Stock,
$0.001 par value per share, were outstanding.




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TVIA, INC. AND SUBSIDIARY FORM 10-Q QUARTERLY PERIOD ENDED JUNE 30, 2004 INDEX PagePart I: Financial InformationItem 1: Financial StatementsUnaudited Condensed Consolidated Balance Sheets
    
    
    1Unaudited Condensed Consolidated Statements of Operations
    
    
    2Unaudited Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    4Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    27Item 4: Controls and Procedures
    
    
    27Part II: Other InformationItem 1: Legal Proceedings
    
    
    28Item 2: Change in Securities and Use of Proceeds
    
    
    28Item 3: Default upon Senior Securities
    
    
    28Item 4: Submission of Matters to Vote of Security Holders
    
    
    28Item 5: Other Information
    
    
    28Item 6: Exhibits and Reports on Form 8-K
    
    
    29Signatures
    
    
    29Certifications
    
    
    30EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
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PART I: FINANCIAL INFORMATION 
 ITEM 1: FINANCIAL STATEMENTS TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 (in thousands)
 JUNE 30,
    
    MARCH 31,2004
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,239
    
    
    $
    3,259Short-term investments
    
    
    24,182
    
    
    
    23,947Accounts receivable, net
    
    
    345
    
    
    
    295Inventories
    
    
    709
    
    
    
    602Prepaid expenses and other current assets
    
    
    454
    
    
    
    1,241Total current assets
    
    
    27,929
    
    
    
    29,344Property and equipment, net
    

    
    1,737
    
    
    
    1,947Other assets
    
    
    106
    
    
    
    112Total assets
    
    $
    29,772
    
    
    $
    31,403LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    260
    
    
    $
    201Accrued liabilities and other
    
    
    615
    
    
    
    657Capital lease obligations
    
    
    371
    
    
    
    486Total current liabilities
    
    
    1,246
    
    
    
    1,344Commitments and contingencies (Note 7)Stockholders equity:Common stock, $0.001 par value, 125,000 shares
authorized, 22,723 and
22,576 shares outstanding, respectively
    
    
    23
    
    
    
    23Additional paid-in-capital
    
    
    92,906
    
    
    
    92,798Accumulated comprehensive income (loss)
    
    
    (108
    )
    
    
    8Accumulated deficit
    
    
    (63,545
    )
    
    
    (62,020
    )Treasury stock
    
    
    (750
    )
    
    
    (750
    )Total stockholders equity
    
    
    28,526
    
    
    
    30,059Total liabilities and stockholders equity
    
    $
    29,772
    
    
    $
    31,403
 The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements. 1




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TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (in thousands, except per share amounts) FOR THE THREE MONTHSENDED JUNE 30,2004
    
    2003Total revenues
    
    $
    528
    
    
    $
    580Cost of revenues
    
    
    292
    
    
    
    343Gross profit
    
    
    236
    
    
    
    237Operating expenses:Research and development
    
    
    1,199
    
    
    
    1,660Sales, general and administrative
    
    
    661
    
    
    
    735Total operating expenses
    
    
    1,860
    
    
    
    2,395Operating loss
    
    
    (1,624
    )
    
    
    (2,158
    )Interest income
    
    
    99
    
    
    
    94Net loss
    
    $
    (1,525
    )
    
    $
    (2,064
    )Basic and diluted net loss per share
    
    $
    (0.07
    )
    
    $
    (0.09
    )Shares used in computing basic and
diluted net loss per share
    
    
    22,675
    
    
    
    22,145
 The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements. 2




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TVIA, INC. AND SUBSIDIARY 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands)
 FOR THE THREEMONTHS ENDEDJUNE 30,2004
    
    2003Cash flows from operating activities:Net loss
    
    $
    (1,525
    )
    
    $
    (2,064
    )Adjustments to reconcile net loss to net cash
used in operating activities:Depreciation and amortization
    
    
    311
    
    
    
    440Change in assets and liabilities:Accounts receivable
    
    
    (50
    )
    
    
    63Inventories
    
    
    (107
    )
    
    
    166Prepaid expenses and other current assets
    
    
    35
    
    
    
    (29
    )Accounts payable
    
    
    59
    
    
    
    (180
    )Accrued liabilities and other
    
    
    (42
    )
    
    
    (264
    )Net cash used in operating activities
    
    
    (1,319
    )
    
    
    (1,868
    )Cash flows from investing activities:Sales of available-for-sale investments
    
    
    1,099
    
    
    
    (4,698
    )Purchases of available-for-sale investments
    
    
    (1,450
    )
    
    
    500Proceeds from sale of software unit
    
    
    752
    
    
    
    Purchases of license technology
    
    
    
    
    
    
    (44
    )Purchases of property and equipment
    
    
    (95
    )
    
    
    (3
    )Restricted cash
    
    
    
    
    
    
    (600
    )Advance cash received from sale of software unit
    
    
    
    
    
    
    5,533Net cash provided by investing activities
    
    
    306
    
    
    
    688Cash flows from financing activities:Proceeds from issuance of common stock
    
    
    108
    
    
    
    18Repayment of capital leases
    
    
    (115
    )
    
    
    (149
    )Net cash used by financing activities
    
    
    (7
    )
    
    
    (131
    )Decrease in cash and cash equivalents
    
    
    (1,020
    )
    
    
    (1,311
    )Cash and cash equivalents at beginning of period
    
    
    3,259
    
    
    
    11,080Cash and cash equivalents at end of period
    
    $
    2,239
    
    
    $
    9,769
 The accompanying notes are an integral part of these Condensed Consolidated
Financial Statements. 3




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TVIA, INC. AND SUBSIDIARY 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1  INTERIM STATEMENTS The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation have been included.
Operating results for the three months ended June 30, 2004, are not necessarily
indicative of the results that may be expected for the fiscal year ending March
31, 2005. Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with general accepted accounting
principles have been condensed or omitted. It is suggested that these
accompanying unaudited condensed consolidated financial statements should be
read in conjunction with the audited consolidated financial statements of Tvia,
Inc. and subsidiary (the Company) for the fiscal year ended March 31, 2004,
which are included in the Companys Annual Report on Form 10-K filed with the
Securities and Exchange Commission on June 22, 2004. NOTE 2  SUMMARY OF SIGNIFICANT POLICIES Use of Estimates The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates, and such differences could be material and affect the results
of operations reported in future periods. Consolidation The condensed consolidated financial statements herein presented include
the results and financial position of Tvia and its wholly-owned subsidiary in
China. The functional currency of the Chinese subsidiary is the U.S. dollar;
accordingly, all gains and losses arising from foreign currency transactions in
currencies other than the U.S. dollar are included in the condensed
consolidated statements of operations. All intercompany transactions and
balances have been eliminated in the consolidation. Cash and Cash Equivalents and Short-Term Investments The Company considers all highly liquid investment securities with
original or remaining maturities of three months or less from the date of
purchase to be cash equivalents. Management determines the appropriate
classification of short-term investments at the time of purchase and evaluates
such designations as of each balance sheet date. To date, all short-term
investments have been categorized as available-for-sale and are carried at fair
value with unrealized gains and losses, if any, included as a component of
accumulated comprehensive income in stockholders equity, net of any related
tax effects. Interest, dividends and realized gains and losses are included in
interest income in the condensed consolidated statements of operations. 4




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Inventories Inventories are stated at the lower of cost (first-in, first-out) or
market value and include materials, labor and overhead. Allowances are made
to reduce excess inventories to their estimated net realizable values when
required. Due to competitive pressures and technological innovation, it is
possible that estimates of net realizable value would change in the near term. Property and Equipment Property and equipment are carried at cost and are depreciated using the
straight-line method over the assets estimated useful life of two to five
years. Management has determined asset lives based on their historical
experience of technical obsolescence of equipment and the short life of tooling
that is specific to certain product families. Long-Lived Assets The Company reviews long-lived assets and certain identifiable intangibles
for impairment. The Company reviews assets to be held and used whenever events
or changes in circumstances indicate that the carrying amount of a long-lived
asset may not be recoverable. The Company measures recoverability of assets by
comparing their carrying amount to the future undiscounted cash flows that they
are expected to generate. Impairment reflects the amount by which the carrying
value of the assets exceeds their fair market value. Revenue Recognition The Company recognizes revenue from product sales upon shipment to the
original equipment manufacturers, or OEMs, and end users provided that
persuasive evidence of an arrangement exists, the price is fixed or
determinable, title has transferred, collection of resulting receivables is
reasonably assured, there are no customer acceptance requirements, and there
are no remaining significant obligations. Reserves for sales returns and
allowances are recorded at the time of shipment. Our sales to distributors are
made under agreements allowing for returns or credits under certain
circumstances. The Company defers recognition of revenue on sales to
distributors until products are resold by the distributor to the end user. The
Company warrants its products; warranty claims historically have been
insignificant. The Company also sells software development kits and application modules
to OEMs. The Company recognizes sales of software development kits and
application modules when an agreement has been executed or a definitive
purchase order has been received and the product has been delivered, no
significant obligations with regard to implementation remain, the fee is fixed
and determinable and collectibility is probable. The maintenance portion of
the arrangements is recognized over the maintenance period on a straight-line
basis. Software Development Costs The Company accounts for software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed. The
Company has expensed all software development costs to date as substantially
all of such development costs have been incurred prior to the Companys
products attaining technological feasibility. Research and Development Expenses Research and development expenses consist primarily of salaries and
related costs of employees engaged in research, design and development
activities. The Company expenses all research and development related expenses
in the period in which such expenses are incurred. Income Taxes Income taxes are accounted for on the asset and liability method. Under
this method, deferred income taxes are recognized based on the estimated future
tax effects of differences between the financial and tax basis of assets and
liabilities under the provisions of enacted tax laws. The effects of deferred
taxes of a change in tax rate is 5




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recognized in the period that includes the enactment date. Valuation
allowances are established when necessary to reduce deferred taxes to the
amounts expected to be realized. Comprehensive Income (Loss) Comprehensive income (loss) is defined as the change in equity during a
period from transactions and events from non-owner sources. The primary
component of comprehensive income (loss) for the Company includes unrealized
gains and losses are disclosed in the Consolidated Statement of Stockholders
Equity. A summary of comprehensive loss is as follows (in thousands): For the Three MonthsEnded June 30,2004
    
    2003Net loss
    
    $
    (1,525
    )
    
    $
    (2,064
    )Change in unrealized gain (loss) on available-for-sale investments
    
    
    (116
    )
    
    
    20Comprehensive loss
    
    $
    (1,641
    )
    
    $
    (2,044
    )
 Stock-Based Compensation The Company accounts for stock-based employee compensation arrangements
using the intrinsic value method as prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and
Financial Accounting Standards Board Interpretation No. 44 Accounting for
Certain Transactions Involving Stock Compensation (FIN 44). Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Companys stock at the date of grant over the stock option
exercise price. Expense associated with stock-based compensation is amortized
on an accelerated basis over the vesting period of the individual award
consistent with the method described in Financial Accounting Standards Board
Interpretation No. 28 (FIN 28). The Company accounts for stock issued to
non-employees in accordance with the provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS
No. 123), SFAS No. 148, Accounting for Stock-Based Compensation, Transition
and Disclosure and Emerging Issues Task Force Consensus No. 96-18, Accounting
for Equity Instruments that are offered to other than employees for acquiring
or in conjunction with selling goods or services (EITF 96-18). Under SFAS
No. 123, SFAS No.148 and EITF 96-18, stock option awards issued to
non-employees are accounted for at their fair value, determined using the
Black-Scholes option pricing method. The fair value of each non-employee stock
option or award is remeasured at each period end until a commitment date is
reached, which is generally the vesting date. The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to the stock-based
employee compensation. For the Three Months EndedJune 30,2004
    
    2003(In thousands, except per share data)Net loss as reported
    
    $
    (1,525
    )
    
    $
    (2,064
    )Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects
    
    
    (355
    )
    
    
    (253
    )Pro forma net loss
    
    $
    (1,880
    )
    
    $
    (2,317
    )Basic and diluted net loss per share:As reported
    
    $
    (0.07
    )
    
    $
    (0.09
    )Pro forma
    
    $
    (0.08
    )
    
    $
    (0.10
    )
 6




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Net Loss Per Share Net loss per share has been calculated in accordance with the Statement of
Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss
per share is computed using the weighted average number of shares of common
stock outstanding. Diluted loss per share information is the same as basic net
loss per share since common shares issuable upon conversion of the stock
options and warrants are antidilutive. The total numbers of shares excluded
from diluted net loss per share relating to these securities were 4,864,576 and
4,499,195 with an average exercise price of $1.84 and $1.98 for the three
months ended June 30, 2004 and 2003, respectively. The following table sets forth the computation of basic and diluted net
loss per share (in thousands except per share amounts): For the three monthsended June 30,2004
    
    2003Net loss
    
    $
    (1,525
    )
    
    $
    (2,064
    )Basic and diluted:Weighted average shares of common stock
outstanding
    
    
    22,675
    
    
    
    22,169Less: Weighted average shares of common
stock subject to repurchase
    
    
    
    
    
    
    (24
    )Weighted average shares used in computing basic
and diluted net loss per share
    
    
    22,675
    
    
    
    22,145Basic and diluted net loss per share
    
    $
    (0.07
    )
    
    $
    (0.09
    )
 Recent Accounting Pronouncements In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS No. 150 establishes
standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. SFAS No. 150
requires that an issuer classify a financial instrument that is within its
scope as a liability (or an asset in some circumstances). SFAS No. 150 is
effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this standard did not have a
material impact on the Companys consolidated financial position, results of
operations or cash flows. In December 2003, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104).SAB 104
revises or rescinds portions of the interpretive guidance included in Topic 13
of the codification of staff accounting bulletins in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The adoption of SAB 104 had no
effect on our results of operations or financial condition. Note 3. Balance Sheet Components (in thousands) 7




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June 30,
    
    March 31,2004
    
    2004Accounts receivable, net:Accounts receivable
    
    $
    348
    
    
    $
    298Less: Allowance for doubtful accounts
    
    
    (3
    )
    
    
    (3
    )$
    345
    
    
    $
    295Allowance for doubtful accounts:Balance at beginning of the year
    
    $
    3
    
    
    $
    50Addition
    
    
    
    
    
    
    15Utilized
    
    
    
    
    
    
    (62
    )Balance at end of the year
    
    $
    3
    
    
    $
    3Inventories:Raw materials
    
    $
    131
    
    
    $
    165Work-in-process
    
    
    253
    
    
    
    42Finished goods
    
    
    325
    
    
    
    395$
    709
    
    
    $
    602Property and equipment, net:Furniture and fixtures (Useful lives of two years)
    
    $
    39
    
    
    $
    39Machinery and equipment (Useful lives of two to five years)
    
    
    2,870
    
    
    
    2,775Software (Useful lives of two to five years)
    
    
    2,851
    
    
    
    2,8515,760
    
    
    
    5,665Less: Accumulated depreciation and amortization
    
    
    (4,023
    )
    
    
    (3,718
    )$
    1,737
    
    
    $
    1,947
 8




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June 30,
    
    March 31,2004
    
    2004Other assets:License technology (Amortized over five years)
    
    $
    81
    
    
    $
    81Less: Amortization
    
    
    (7
    )
    
    
    (1
    )License technology, net
    
    
    74
    
    
    
    80Deposits
    
    
    32
    
    
    
    32$
    106
    
    
    $
    112Accrued expenses:Accrued compensation costs
    
    $
    525
    
    
    $
    421Accrued software maintenance
    
    
    
    
    
    
    13Other
    
    
    90
    
    
    
    223$
    615
    
    
    $
    657
 9




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4. Short-term Investments The value of the Companys investments by major security type is as follows: As of June 30, 2004Amortized
    
    Aggregate
    
    Unrealized
    
    UnrealizedCost
    
    Fair Value
    
    Gain
    
    Loss(In thousands)Government and agency securities
    
    $
    6,000
    
    
    $
    5,973
    
    
    $
    
    
    
    $
    27US corporate and bank debt
    
    
    18,290
    
    
    
    18,209
    
    
    
    
    
    
    
    81Total
    
    $
    24,290
    
    
    $
    24,182
    
    
    $
    
    
    
    $
    108
 As of March 31, 2004Amortized
    
    Aggregate
    
    Unrealized
    
    UnrealizedCost
    
    Fair Value
    
    Gain
    
    Loss(In thousands)Government and agency securities
    
    $
    6,000
    
    
    $
    6,000
    
    
    $
    
    
    
    $
    US corporate and bank debt
    
    
    17,939
    
    
    
    17,947
    
    
    
    8
    
    
    
    Total
    
    $
    23,939
    
    
    $
    23,947
    
    
    $
    8
    
    
    $
    
 Note 5. Concentration of Certain Risks The Company is subject to the risks associated with similar technology
companies. These risks include, but are not limited to: history of operating
losses, dependence on a small number of key individuals, customers and
suppliers, competition from larger and more established companies, the impact
of rapid technological changes and changes in customer demand and requirements. Significant customers Revenues to significant customers, those representing approximately 10% or
more of total revenues for the respective periods, are summarized as follows: 10




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For the MonthsEnded June 30,2004
    
    2003Customer A
    
    
    35
    %
    
    
    27
    %Customer B
    
    
    20
    %
    
    
    11
    %Customer C
    
    
    *
    
    
    
    15
    %Customer D
    
    
    *
    
    
    
    14
    %Customer E
    
    
    *
    
    
    
    12
    %
 (* = less than 10%) Concentration of Credit Risk Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of bank deposits and accounts
receivable. The Company places its cash and cash equivalents in checking and
money market accounts in financial institutions. The Companys accounts
receivable are derived primarily from sales to OEMs and distributors. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for potential doubtful accounts. Accounts receivable were concentrated with customers as follows: June 30,
    
    June 30,2004
    
    2003Accounts Receivable:Customer A
    
    
    53
    %
    
    
    59
    %Customer B
    
    
    12
    %
    
    
    *Customer C
    
    
    *
    
    
    
    13
    %
 (* = less than 10%) Vendor Concentration The Company does not own or operate a fabrication facility, and
accordingly relies substantially on three outside foundries, United
Manufacturing Corporation (UMC) and Taiwan Semiconductor Manufacturing
Corporation (TSMC), both are located in Taiwan and Huahong NEC in the
Peoples Republic of China to supply all of the Companys semiconductor
manufacturing requirements. There are significant risks associated with the
Companys reliance on outside foundries, including the lack of ensured wafer
supply, limited control over delivery schedules, quality assurance and control,
manufacturing yields and production costs and the unavailability of or delays
in obtaining access to key process technologies. Any inability of one of the
foundries to provide the necessary components could result in significant
delays and could have a material adverse effect on the Companys business,
financial condition and results of operations. In the event either foundry
suffers financial difficulties or suffers any damage or destruction to its
respective facilities, or in the event of any other disruption of foundry
capacity, the Company may not be able to qualify alternative manufacturing
sources for existing or new products in a timely manner. Substantially all of the Companys products are assembled and tested by
one of three third-party subcontractors, Siliconware Precision Industries
Ltd., and Advance Semiconductor Engineering, Inc., both located in Taiwan, and
Belling Corp., Ltd. in the Peoples Republic of China. The availability of
assembly and testing services from these subcontractors could be adversely
affected in the event any subcontractor experiences financial difficulties or
suffers any damage or destruction to its respective facilities, or in the event
of any other disruption of assembly and testing capacity. As a result of this
reliance on third-party subcontractors for assembly and testing of its
products, the Company cannot directly control product delivery schedules, which
has in the past, and could in the future, result in 11




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product shortages or quality assurance problems that could increase the cost of
manufacture, assembly or testing of the Companys products. Note 6. Segment and Geographic Information The Company is organized and operates in one reportable segment, which is
the development, manufacture and sale of streaming media integrated circuits
for the advanced television and emerging interactive display markets. The following table summarizes revenues by geographic area as a percentage
of total revenues: For the Three MonthsEnded June 30,2004
    
    2003Europe
    
    
    36
    %
    
    
    38
    %Japan
    
    
    20
    %
    
    
    11
    %United States
    
    
    13
    %
    
    
    18
    %Taiwan
    
    
    *
    
    
    
    20
    %Korea
    
    
    *
    
    
    
    12
    %
 Note 7. Commitments and Contingencies Stock Repurchase On November 10, 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market. Under this
program, the Board of Directors authorized the acquisition of up to 200,000 of
the Companys common stock. This program does not have a stock repurchase
maximum amount or an expiration date. As of June 30, 2004, the Company
acquired 143,700 shares on the open market that it holds as treasury stock. On August 20, 2002, the Board of Directors authorized an additional stock
repurchase program to acquire outstanding common stock in the open market.
Under this program, the Board of Directors authorized the acquisition up to 5
million shares of common stock. As of June 30, 2004, we had not repurchased
any shares of common stock under this program. Litigation The Company is subject to various claims which arise in the normal course
of business. In the opinion of management, the Company is unaware of any claims
which would have a material adverse effect on the financial position, liquidity
or results of operations of the Company. 12




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Lease Commitments The Company leases its facilities under non-cancelable operating leases
expiring at various dates through July 2005. The Company leases certain fixed
assets under capital leases expiring at various dates through February 2005. Future payments due under capital and operating leases as of June 30, 2004
are as follows (in thousands): Fiscal
    
    Capital
    
    OperatingYear
    
    Leases
    
    Leases2005
    
    $
    375
    
    
    $
    1292006
    
    
    
    
    
    
    47Total minimum lease payments
    
    
    375
    
    
    $
    176Less: Amount representing interest
    
    
    (4
    )Present value of minimum payments
    
    
    371Current portion
    
    $
    371
 13




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ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS This Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the unaudited
condensed financial statements and notes thereto set forth in Item 1 of this
report. In addition to historical information, this Quarterly Report on Form 10-Q
contains forward-looking statements, including statements regarding revenues
and sources of revenues, that involve risks and uncertainties that could cause
actual results to differ materially. Factors that might cause or contribute to
such differences include, but are not limited to, those discussed in the
section entitled Managements Discussion and Analysis of Financial Condition
and Results of OperationsFactors That May Affect Future Performance. You
should carefully review the risks described herein and in other documents we
file from time to time with the Securities and Exchange Commission, including
the Annual Report onForm 10-Kfor fiscal 2004. When used in this report, the
words expects, anticipates, estimates, and similar expressions, as well
as statements regarding Tvias focus for the future, are generally intended to
identify forward-looking statements. You should not place undue reliance on
these forward-looking statements, which speak only as of the date of this
Quarterly Report onForm 10-Q. We undertake no obligation to publicly release
any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document. Overview We design, develop and market display processors for the
interactive-television market as well as a family of flexible, high-quality
display processors tailored to the Asia Pacific television manufacturers
creating next-generation digital LCD, HD, and progressive-scan televisions. We currently offer five product families: the TrueView 5700 family,
introduced in calendar year 2004; the CyberPro 5600 family, introduced in
calendar year 2003; the CyberPro 5202 family, introduced in calendar year 2002;
the CyberPro 5300 family, introduced in calendar year 1999; and the CyberPro
5000 family, introduced in calendar year 1998. These product families
currently generate most of our revenues. We sell our products through two
channels. First, we sell our products directly to original equipment
manufacturers, or OEMs, and recognize revenues at the time of shipment to these
OEMs. Second, we sell our products to a number of distributors. We defer
recognition of revenues for sales to our distributors until they have sold our
products to end-users. We also generate revenues from licensing software,
which we believe will continue to constitute a small percentage of total
revenues in the future. Approximately 87% and 82% of our total revenues for the three months ended
June 30, 2004 and 2003, respectively, were derived from customers located
outside the United States. All of our revenues to date have been denominated
in United States dollars. Historically, a relatively small number of customers
and distributors have accounted for a significant portion of our product sales.
Our top two customers, including distributors, accounted for 55% of total
revenues in the three months ended June 30, 2004. Our top five customers,
including distributors, accounted for 79% of total revenues in the three months
ended June 30, 2003. Various factors have affected and may continue to affect our gross margin.
These factors include, but are not limited to, our product mix, the position
of our products in their respective life cycles, yields and the mix of our
product sales and development contracts and other revenues. For example, newly
introduced products generally have higher average selling prices and generate
higher gross margins. Both average selling prices and the related gross
margins typically decline over product life cycles due to competitive pressures
and volume price agreements. Our gross margin and operating results in the
future may continue to fluctuate as a result of these and other factors. The sales cycle for the test and evaluation of our products can range from
three months to nine months or more, with an additional three to nine months or
more before an OEM customer commences volume production of 14




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equipment incorporating our products, if ever. Due to these lengthy sales
cycles, we may experience a delay between incurring operating expenses and
inventory costs and the generation of revenues from design wins. We have sustained operating losses on a quarterly and annual basis since
inception. As of June 30, 2004, we had an accumulated deficit of approximately
$63.5 million. These losses resulted from significant costs incurred in the
planning and development of our technology and services and from significant
marketing costs. We expect to experience significant research and development
expenses, as we design and market new technologies. We anticipate flat revenues or a small increase the next quarter as
compared to the same period in the prior fiscal year. We believe that it will
take time for customers to ramp up production of digital television, while the
interactive television industry is not expected to recover for one to two
years. Due to anticipated flat revenues, we anticipate that we will continue
to incur net losses at least at the level incurred in the quarter ended June
30, 2004 for the next quarter. We have a subsidiary in Hefei, Peoples Republic of China, which performs
final test, sales and research and development activities. 15




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Critical Accounting Policies For critical accounting policies affecting us, see Item 7 Managements
Discussion and Analysis of Financial Condition and Results of Operations of
our Annual Report on Form 10-K for the year ended March 31, 2004. Critical
accounting policies affecting us have not changed materially since March 31,
2004. Results of Operations The following table sets forth, for the periods indicated, certain
financial data as a percentage of revenue: For the three months endedJune 30,2004
    
    2003Revenues
    
    
    100
    %
    
    
    100
    %Cost of revenues
    
    
    55
    
    
    
    59Gross profit
    
    
    45
    
    
    
    41Operating expenses:Research and development
    
    
    227
    
    
    
    286Sales, general and administrative
    
    
    125
    
    
    
    127Total operating expenses
    
    
    352
    
    
    
    413Operating loss
    
    
    (307
    )
    
    
    (372
    )Interest income
    
    
    19
    
    
    
    16Net loss
    
    
    (288
    )%
    
    
    (356
    )%
 Revenues. Revenues decreased to $528,000 in the three months ended June
30, 2004 compared to $580,000 in the three months ended June 30, 2003. The
decrease was primarily due to a slower than anticipated emergence of the
interactive television market and weak global general economic conditions.
Revenues from SMS Electronics, Ltd. and Kanematsu Devices Corporation accounted
for 35% and 20%, respectively, of total revenues for the three months ended
June 30, 2004. Revenues from SMS Electronics, Ltd., iVAST Inc., Weikeng
Industrial, Ltd., Micro Network Korea Co., Ltd. and Kanematsu Devices
Corporation accounted for 27%, 15%, 14%, 12% and 11%, respectively, of total
revenues for the three months ended June 30, 2003. Gross margin. Gross margin for the three months ended June 30, 2004 was
45% compared to 41% in the same period of fiscal 2004. The increase in gross
margin resulted primarily from lower overhead burden. The reduction in
overhead burden was due to lower headcount and facilities costs. Many factors
affect our profit margin, including, but not limited to, our product mix, the
position of our products in their respective life cycles, yields and the mix of
our product sales and development contracts and other revenues. Research and development. Research and development expenses include
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Our research and
development expenses reflect our continuing efforts to develop and bring to
market innovative and cost effective semiconductors that process the rich media
content available on the internet and the broadband network. Research and
development expenses decreased to $1.2 million in the three months ended June
30, 2004 from $1.7 million in the three months ended June 30, 2003. Research
and development expenses as a percentage of total revenues were 227% in the
first three months ended June 30, 2004 compared to 286% in the same period of
fiscal 2004. The decrease in research and development expenses in absolute
dollars and as a percentage of revenues in the first three months ended June
30, 2004 compared to the same period of fiscal 2004 is attributable primarily
to lower 16




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headcount resulting from the sale of our software unit to Mediatek, Inc.
in July 2003. Headcount in research and development decreased from 208 in June
2003 to 92 in June 2004. We expect absolute research and development expenses
in the next quarter to slightly increase compared to the quarter ended June 30,
2004. Sales, general and administrative. Sales, general and administrative
expenses consist primarily of personnel and other costs associated with the
management of our business and with the sale and marketing of our products.
Sales, general and administrative expenses were $0.7 million and $0.7 million
in the three months ended June 30, 2004 and 2003, respectively. Sales, general
and administrative expenses as a percentage of total revenues was 125% in the
first three months of fiscal year 2005 compared to 127% in the same period of
fiscal year 2004. The decrease in sales, general and administrative expenses
in absolute dollars and as a percentage of revenues resulted from a reduction
in workforce and other cost cutting measures. Headcount in sales, general and
administrative decreased from 25 in June 2003 to 21 in June 2004. We expect
that sales, general and administrative expenses in the next quarter will be
approximately at the same level as the quarter ended June 30, 2004. Interest income. Interest income was $99,000 for the three months ended
June 30, 2004, compared to $94,000 for the three months ended June 30, 2003.
The increase resulted from higher cash and investment balances. Provision for income tax. We are taxed in our jurisdictions of operations
based on the extent of taxable income generated in each jurisdiction. For
income tax purposes, revenues are attributed to the taxable jurisdiction where
the sales transactions generating the revenues were initiated. We incurred
operating losses in the three months ended June 30, 2004 and 2003, and
therefore made no provision for income tax in these periods. Liquidity and Capital Resources During the three months ended June 30, 2004, we used $1.3 million of cash
and cash equivalents in our operating activities as compared to $1.9 million
during the three months ended June 30, 2003. Cash used in operations during
the three months ended June 30, 2004 resulted primarily from net loss of $1.5
million and an increase in inventories of $0.1 million partially offset by
non-cash items of depreciation and amortization of $0.3 million. Cash used in
operations during the three months ended June 30, 2003 resulted primarily from
net loss of $2.1 million partially offset by non-cash items of depreciation and
amortization of $0.4 million and a decrease in accrued liabilities and other of
$0.3 million. Cash flows provided by investing activities were $0.3 million during the
three months ended June 30, 2004 compared to $0.7 million during the three
months ended June 30, 2003. This decrease was primarily due to the net
purchase of investments offset by a portion of the proceeds from the sale of
the software unit. As of June 30, 2004, we did not have any significant
capital purchase commitments. Net cash flows used in financing activities were none and $0.1 million for
the three months ended June 30, 2004 and 2003, respectively. They were
attributable to payments of capital leases, partially offset by the proceeds
from the sale of common stock under our Incentive Stock and Employee Stock
Purchase Plans. As of June 30, 2004, our principal source of liquidity consisted of cash
and cash equivalents and short-term investments. Working capital at June 30,
2004 was $26.7 million. The following represent our significant working capital commitments: Stock Repurchase On November 10, 2001, the Board of Directors authorized a stock repurchase
program to acquire outstanding common stock in the open market. Under this
program, the Board of Directors authorized the acquisition of up to 200,000 of
the Companys common stock. As of June 30, 2004, the Company acquired 143,700
shares on the open market that it holds as treasury stock. At the June 30,
2004 stock price, the proceeds to be used to acquire up to 56,300 shares of the
Companys common stock will have a minimal impact on the Companys current
cash, cash equivalent and short-term investment balances. On August 20, 2002, the Board of Directors authorized an additional stock
repurchase program to acquire outstanding common stock in the open market.
Under this program, the Board of Directors authorized the 17




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acquisition up to 5 million shares of common stock. As of June 30, 2004, we
had not repurchased any shares of common stock under this program. Lease Commitments The Company leases its facilities under non-cancelable operating leases
expiring at various dates through July 2005. Future payments due under capital
and operating leases as of June 30, 2004 are as follows (in thousands): Fiscal
    
    Capital
    
    OperatingYear
    
    Leases
    
    Leases2005
    
    $
    375
    
    
    $
    1292006
    
    
    
    
    
    
    47Total minimum lease payments
    
    
    375
    
    
    $
    176Less: Amount representing interest
    
    
    (4
    )Present value of minimum payments
    
    
    371Current portion
    
    $
    371
 As of June 30, 2004, we had approximately $169,000 of outstanding purchase
commitments with a supplier for the purchase of wafers and a packaging
subcontractor. We expect to receive and pay for the wafers, within the next
six months, from our existing cash balances. Based on our current expectations, we believe that our principal source of
liquidity consisting of our cash and cash equivalents and short-term
investment, which totaled $26.4 million at June 30, 2004, will be sufficient to
meet our working capital and capital requirements through at least the next
twelve months. 18




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Factors that May Affect Future Results We expect continuing losses and may not achieve profitability which could
affect our ability to expand our business. We have incurred significant operating losses in each year since our
inception, except in fiscal year 2004. The net income reported in fiscal year
2004 was primarily due to the sale of our software business. We expect to
continue to incur net losses for the foreseeable future, primarily as a result
of expenses for research and development. Our losses increased as we
transitioned our focus away from the personal computer market toward the
advanced television and emerging interactive display markets in 1996. We have
incurred net losses of approximately $63.5 million from our inception in March
1993 through June 30, 2004. If we continue to incur net losses, we may not be
able to expand our business as quickly as we would like. We do not know when
or if we will become profitable and if we do become profitable, we may not be
able to sustain or increase our profitability. Because the emergence of the interactive television market has been slower than
anticipated, we may not be able to sell our multimedia display processors or
sustain our business. Our multi-media display processors are incorporated into products that
allow interactive television. The concept of interactive television and the
market for products that facilitate it are new and developing. As a result,
our profit potential is unproven and may never materialize. Broad acceptance
of advanced televisions and emerging interactive displays will depend on the
extent to which consumers use devices other than personal computers to access
the Internet. To date, the market for these products has not developed as
quickly as our customers and we had previously anticipated. Consequently,
certain of our customers have significant inventory of our semiconductors or
products that incorporate our semiconductors, thereby limiting the opportunity
to sell additional semiconductors to these customers until their present
inventories are depleted. Our success will also depend on the ability of OEMs
and service providers that work with our OEMs to create demand for and market
the products incorporating our semiconductors. Unless a sufficiently large
market for advanced televisions and emerging interactive displays and other
products that are used for interactive television develops, demand for products
incorporating our semiconductor solutions may not be sufficient to sustain our
business. A significant amount of our revenues comes from a few customers and any
decrease in revenues from these customers could significantly impact our
financial results. Historically we have been, and we expect to continue to be, dependent on a
relatively small number of OEMs and distributors for a significant portion of
our total revenues. Sales from SMS Electronics, Ltd. and Kanematsu Devices
Corporation accounted for 35% and 20% of total revenues for the three months
ended June 30, 2004, respectively. Sales from SMS Electronics, Ltd., iVAST,
Inc., Weikeng Industrial, Ltd., Micro Network Korea Co., Ltd. and Kanematsu
Devices Corporation accounted for 27%, 15%, 14%, 12% and 11% of total revenues
for the three months ended June 30, 2003, respectively. We may not be able to
retain our largest customers or to obtain additional key accounts. Any
reduction or delay in sales of our products to one or more key customer or our
inability to successfully develop relationships with additional key customers
could negatively impact our financial results. Our operating expenses may increase as we build our business and these
increased expenses may impact our ability to become profitable. We have made substantial expenditures on research and development and
organizational infrastructure consisting of an executive team, finance, sales,
marketing and management information systems departments and our design center
located in the Peoples Republic of China. For the fiscal years ended March
31, 2004, 2003 and 2002 and the three months ended June 30, 2004 and 2003,
research and development expenses represented 295%, 402%, 107%, 227% and 286%
of our revenues, respectively. We expect to continue to spend substantial
financial and other resources on developing and introducing new products and
services. While we have implemented actions to reduce our operating expenses,
and our operating expenses may increase as a percentage of revenues if our
revenues decline. If our revenues do not increase, our business and results of
operations could suffer. We base our 19




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expense levels in part on our expectations regarding future revenues. If
our revenues for a particular quarter are lower than we expect, we may be
unable to proportionately reduce our operating expenses for that quarter. Customers may cancel or defer significant purchase orders, or our distributors
may return our products, which would cause our inventory levels to increase and
our revenues to decline. We sell our products on a purchase order basis through our direct sales
channel, sales representatives and distributors, and our customers may cancel
or defer purchase orders at any time with little or no penalty. We recognize
revenues from sales to our distributors when the distributors have sold our
products to their customers. We recognize revenues on sales to our OEM
customers when we ship our products to the OEM. We permit certain of our
distributors to return products to us. If our customers cancel or defer
significant purchase orders or our distributors return our products, our
inventories would increase and our revenues would decrease, which would
materially harm our business, as increases in inventory reserves could be
required. Refusal of OEM customers to accept shipped products or delays or
difficulties in collecting accounts receivable could have an adverse effect on
our business. Because of our long product development process and sales cycle, we incur
substantial expenses before we generate revenues and may not recover our
expenditures. To develop market acceptance of our products, we must dedicate significant
resources to research and development, production and sales and marketing. We
develop products based on forecasts of demand and we incur substantial product
development expenditures prior to generating associated revenues. Our
customers typically perform numerous tests and extensively evaluate our
products before incorporating them into their systems. The time required for
testing, evaluating and designing our products into a customers equipment can
take up to nine months or more, with an additional three to nine months or more
before an OEM customer commences volume production of equipment incorporating
our products, if ever. Because of this lengthy development cycle, we may
experience a delay between the time we accrue expenses for research and
development and sales and marketing efforts and the time when we generate
revenues, if any. Furthermore, achieving a design win with a customer does not necessarily
mean that this customer will order large volumes of our products. A design win
is not a binding commitment by a customer to purchase our products. Rather, it
is a decision by a customer to use our products in the design process. In
addition, our customers can choose at any time to discontinue using our
products in that customers designs or product development efforts. If our
products are chosen to be incorporated into a customers products, we may still
not realize significant revenues from that customer if that customers products
are not commercially successful. As a result, our profitability from quarter
to quarter and from year to year may be materially affected by the number and
timing of our new product introductions in any period and the level of
acceptance gained by these products. If we fail to successfully develop, introduce and sell new products, we may be
unable to effectively compete in the future. We operate in a highly competitive, quickly changing environment marked by
new and emerging products and technologies. Our success depends on our ability
to develop, introduce and successfully market new products and enhance our
existing products in the advanced television and emerging interactive display
markets. The development of these new products is highly complex and, from
time to time, we have experienced delays in completing their development and
introduction. Any one of the following factors could affect our ability to
develop, introduce and sell new products and could materially harm our
business:  
    
    our failure to complete new product designs in a timely manner;
    
    our inability to manufacture our new products according to design specifications;
    
    our inability to deliver our products to our customers in a timely manner for any reason,
including a lack of manufacturing capacity or the failure of our
contracted foundries to meet
targeted manufacturing yields; and 20




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
    
    our sales forces and independent distributors
inability to create adequate demand for our
products. Our future operating results are likely to fluctuate and may fail to meet
expectations which could cause our stock price to decline. Our operating results have varied in the past and are likely to do so in
the future as we attempt to meet consumer demand in the markets for advanced
televisions and emerging interactive displays. Our future operating results
will depend on many factors and may fail to meet our expectations for a number
of reasons. Any failure to meet these expectations or those of securities

analysts and investors could cause our stock price to fluctuate or decline
significantly. A number of factors, including those listed below, may cause
fluctuations in our operating results and stock price:  
    
    the general condition of the semiconductor industry
market;
    
    fluctuations in the volume of product sales, changes
in product mix and pricing concessions on
sales;
    
    the timing, rescheduling or cancellation of significant customer orders;
    
    the timing of investments in, and the results of, research and development;
    
    changes in industry standards;
    
    introduction of interactive television services by service providers;
    
    availability of manufacturing capacity and raw materials, and inventory write-offs;
    
    product introductions and price changes by our competitors;
    
    our ability to specify, develop, introduce and market new products with smaller geometries,
more features and higher levels of design integration in accordance
with design requirements
and design cycles;
    
    the level of orders received that can be shipped in a given period;
    
    changes in earning estimates or investment recommendations by analysts;
    
    changes in investors perceptions; and
    
    the effect of the terrorist attacks in the United
States and any related conflicts or similar events
worldwide. Our industry is highly competitive, and we cannot assure you that we will be
able to effectively compete. The market for advanced televisions and emerging interactive displays in
particular, and the semiconductor industry in general, are highly competitive.
We compete with a number of domestic and international suppliers of
semiconductors in our targeted markets. We expect competition to intensify as
current competitors expand their product offerings and new competitors enter
our targeted markets. We believe that we must compete on the basis of a
variety of factors, including:  
    
    functionality;
    
    performance; 21




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
    
    time to market;
    
    price;
    
    conformity to industry standards;
    
    product road maps; and
    
    technical support. We currently compete with ATI Technologies, Inc., Broadcom Corporation,
Genesis Microchip, Inc., Pixelworks, Inc., Trident Microsystems, Inc. and
Silicon Image, Inc. In addition to these competitors, we expect other major
semiconductor manufacturers will enter our targeted markets as the multi-media
display processors, advanced television emerging display markets become more
established. A number of companies, including International Business Machines
Corporation, STMicroelectronics N.V., National Semiconductor Corporation,
Equator Technologies, Inc., LSI Logic and Philips Electronics N.V., have
announced that they are developing or plan to introduce competing products in
the advanced television and emerging interactive display markets which could
result in significant competition. Some of our current and potential competitors operate their own
fabrication facilities or have a longer operating history and significantly
greater financial, sales and marketing resources. They may also have
preexisting relationships with our customers or potential customers. As a
result, these competitors may be able to adapt more quickly to new or emerging
products, develop new technologies, or address changes in customer requirements
or devote greater resources to the development and promotion of strategic
relationships among themselves or with existing or potential customers. It is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. Increased competition could harm our
business, results of operations and financial condition by, for example,
increasing pressure on our profit margin or causing us to lose sales
opportunities. We depend on three independent foundries to manufacture our products based on
our forecasts, which could result in an oversupply or undersupply of products. We do not own or operate our own fabrication facility. We currently
depend upon three outside foundries, United Manufacturing Corporation, or UMC,
and Taiwan Semiconductor Manufacturing Corporation, or TSMC, both are in
Taiwan, and HuaHong NEC in the Peoples Republic of China. We do not have long
term supply agreements with these foundries to manufacture our semiconductor
products. Both of these foundries are located in Taiwan and each has limited
manufacturing capacity. The foundries require us to provide forecasts of our anticipated
manufacturing orders in advance of receiving purchase orders from our
customers. This may result in product shortages or excess product inventory.
Obtaining additional supply in the face of product shortages may be costly or
not possible, especially in the short term. Our failure to adequately forecast
demand for our products would materially harm our business. For example, in
fiscal 2002 we took an inventory charge related to slow moving inventory. The
foundries may allocate capacity to the production of other companies products
while reducing delivery to us on short notice. We may encounter periods of semiconductor oversupply, resulting in pricing
pressure, as well as undersupply, resulting in a risk that we could be unable
to fulfill our customers requirements. The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products. These
fluctuations have resulted in circumstances when supply and demand for the
industrys products have been widely out of balance. Our operating results may
be materially harmed by industry wide semiconductor oversupply, which could
result in severe pricing pressure or inventory write-downs. For example, in
fiscal 2002 we took an inventory charge for slow moving inventory, which
negatively impacted our gross margin for fiscal 2002. On the other hand, in a
market with undersupply, we would have to compete with larger companies for
limited manufacturing capacity. If material shortages occur, we may incur
additional costs to procure the scarce components or be unable to have our
products manufactured in a timely manner or in quantities 22




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necessary to meet our requirements. Since we outsource all of our
manufacturing, we are particularly vulnerable to supply shortages. As a
result, we may be unable to fill orders and may lose customers. Any future
industry wide oversupply or undersupply of semiconductors would materially harm
our business and have a negative impact on our earnings. If we have to qualify new independent foundries for any of our products and do
not have sufficient supply of our products on hand, we may lose revenues and
damage our customer relationships. Processes used to manufacture our products are complex, customized to our
specifications and can only be performed by a limited number of manufacturing
facilities. The foundries we use have from time to time experienced lower than
anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start up of new process
technologies. In addition, the foundries we use are located in a seismically
active area, and earthquakes have caused these foundries to close for repairs,
resulting in a delay in manufacturing our products. Although we primarily utilize two independent foundries, most of our
components are not manufactured at both foundries at any given time. The
inability of one of the foundries to provide components could result in
significant delays and harm our business. In the event either foundry
experienced manufacturing or financial difficulties or suffered any damage or
destruction to its facilities, or in the event of any other disruption of
foundry capacity, we may not be able to qualify alternative manufacturing
sources for existing or new products in a timely manner. For example, in
September 1999, Taiwan experienced a major earthquake. The earthquake and its
resulting aftershocks caused power outages and significant damage to Taiwans
infrastructure. Similarly, in September 2001, a typhoon hit Taiwan causing
businesses in Taipei and the financial markets to close for two days. In
addition, as a result of the rapid growth of the semiconductor industry based
in the industrial park where both foundries are located, severe constraints
have been placed on the water and electricity supply in that region. Any
shortages of water or electricity or a natural disaster could adversely affect
these foundries ability to supply our products, which could have a material
adverse effect on our operating results. Even our current outside foundries would need to have manufacturing
processes qualified in the event of a disruption at the other foundry, which we
may not be able to accomplish in a timely manner sufficient to prevent an
interruption in the supply of the affected products. We cannot assure you that
any existing or new foundries would be able to produce integrated circuits with
acceptable manufacturing yields in the future, or will continue to have
sufficient capacity to meet our needs. If our manufacturing requirements are
not satisfied, our business would be materially harmed. Our semiconductors are complex to manufacture and may have errors or defects
which could be costly to correct. The manufacture of semiconductors is a complex process. Foundries may not
achieve acceptable product yields from time to time due to the complexity of
the integrated circuit design, inadequate manufacturing processes and other
reasons. We refer to the proportion of final acceptable integrated circuits
that have been processed, assembled and tested relative to the gross number of
integrated circuits that could have been produced from the raw materials as our
product yields. Identifying defects and determining the reason for low yields
may be discovered after production has begun and at various stages of the
production cycle. Our failure to discover defects early in the production
cycle will result in higher costs and may require a diversion of our technical
personnel and resources away from product development in order to correct the
defect. In addition, defective products that have been released into the
market and distributed to our customers and end users may result in harm to our
reputation, significant warranty costs, diversion of our technical and
managerial resources and potential product liability claims that would be
costly to defend. Our software is complex and may have bugs or defects which could be costly to
correct. Our products depend on complex software that we develop internally and
license from others. Complex software often contains defects, particularly
when first introduced or when new versions are released. Determining whether
our software has defects may occur after our products are released into the
market and distributed to our customers and end users, and may result in harm
to our reputation, significant warranty costs, diversion of our 23




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technical resources and potential product liability claims that would be
costly to defend and divert managerial resources. We face foreign business, political and economic risks because a majority of
our sales are to customers outside of the United States. Sales of our products to our OEM customers and to distributors located
outside the United States accounted for 76%, 86%, 32%, 87% and 82% of our total
revenues in fiscal years 2004, 2003 and 2002 and three months ended June 30,
2004 and 2003, respectively. We anticipate that sales to customers located
outside the United States will continue to represent a significant portion of
our total sales in future periods. In addition, many of our domestic customers
sell their products outside of North America, thereby indirectly exposing us to
risks associated with foreign commerce. Asian economic instability impacts the
sales of products manufactured by our customers, as does the Chinese New Year,
during which time many manufacturers and businesses close their operations. We
may be negatively impacted by the terrorist attacks on the United States and
the resulting conflicts worldwide. We could also experience greater
difficulties collecting accounts receivable from customers outside of the
United States. Accordingly, our operations and revenues are subject to a
number of risks associated with foreign commerce. To date, we have denominated sales of our products in foreign countries
exclusively in United States dollars. As a result, any increase in the value
of the United States dollar relative to the local currency of a foreign country
will increase the price of our products in that country so that our products
become relatively more expensive to customers in the local currency of that
foreign country. As a result, sales of our products in that foreign country
may decline. To the extent any of these types of risks materialize, our
business would be materially harmed. If the industries into which we sell our products experience recession or other
cyclical effects impacting our customers budgets, our operating results could
be negatively impacted. The primary customers for our products are companies in the advanced
television and emerging display device markets. Any significant downturn in
these particular markets or in general economic conditions which result in the
cutback of research and development budgets or capital expenditures would
likely result in the reduction in demand for our products and services and
could harm our business. For example, the United States economy, including the
semiconductor industry, has experienced a recession, which has negatively
impacted our business and operating results. A further decline in the United
States economy could result from further terrorist attacks in the United
States. If the economy continues to decline as a result of the recent
economic, political and social turmoil, existing and perspective customers may
continue to reduce their design budgets or delay implementation of our
products, which could further harm our business and operating results. In addition, the markets of semiconductor products are cyclical. In
recent years, some Asian countries have experienced significant economic
difficulties, including devaluation and instability business failures and a
depressed business environment. These difficulties triggered a significant
downturn in the semiconductor market, resulting in reduced budgets for chip
design tools. In addition, the electronics industry has historically been
subject to seasonal and cyclical fluctuations in demand for its products, and
this trend may continue in the future. These industry downturns have been, and
my continue to be, characterized by diminished product demand, excess
manufacturing capacity and subsequent erosion of average selling prices. As a
result, our future operating results may reflect substantial fluctuations from
period to period as a consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and other factors.
Any negative factors affecting the semiconductor industry, including the
downturns described here, could significantly harm our business, financial
condition and results of operations. The rapid growth of our business and operations has strained and may continue

to strain our administrative, operational and financial resources, and our
failure to manage our future growth could affect our operations and our future
ability to expand. We have in the past and may in the future experience rapid growth and
expansion in our business and operations. Our growth has placed a significant
strain on our administrative, operational and financial resources and increased
demands on our systems and controls. Our future growth may require the
implementation of a variety of new and upgraded operational and financial
systems, procedures and controls, including improvement of our 24




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accounting and other internal management systems, all of which may require
substantial managerial effort. We cannot assure you that these efforts would
be accomplished successfully. Our growth has resulted in a continuing increase
in the level of responsibility for both existing and new management personnel,
and may require that we recruit, hire and train a substantial number of new
personnel. Our failure to manage our past and future growth could prevent us
from successfully achieving market acceptance for our products, disrupt our
operations, delay our expansion and harm our business. We depend on key personnel, the loss of whom would impair or inhibit the growth
of our business. Our success depends on the skills, experience and performance of our
executive officers and other key management and technical personnel, many of
whom would be difficult to replace. We are particularly dependent on Eli
Porat, our Chief Executive Officer and President. The competition for
employees with technical skills is intense and we may not be able to attract
and retain a sufficient number of such qualified new personnel in the future.
The loss of the service of one or more of our key employees, or our failure to
attract, retain and motivate qualified personnel would inhibit the growth of
our business. We rely on strategic relationships to commercialize our products, and these
relationships may require that we expend significant resources without
guarantees that our endeavors will be profitable. We rely on strategic relationships with some of our customers who we
believe are the market leaders in our target markets. These relationships
often involve the proposed development by us of new products involving
significant technological challenges. Since the proposed products under
development may offer potential competitive advantages to our customers,
considerable pressure is frequently placed on us to meet development schedules.
While an essential element of our strategy involves establishing such
relationships, these projects require substantial amounts of our limited
resources, with no guarantee of revenues to us, and could materially detract
from or delay the completion of other important development projects. Delays in
development could impair the relationship between our customers and us and
negatively impact sales of the products under development. Moreover, our
customers may develop their own solutions for products currently supplied by
us, which could have an adverse effect on our business. We depend on third party subcontractors for assembly of our semiconductors
which reduces our control over the delivery, quantity, quality, or cost of our
products. Substantially all of our products are assembled by one of three
subcontractors, two of which are located in Taiwan and one in Shanghai,
Peoples Republic of China. Typically, we procure services from these
subcontractors on a purchase order basis. Their availability to assemble our
products could be adversely affected if either subcontractor experiences
financial difficulties or suffers any damage or destruction to its facilities
or any other disruption of its assembly capacity. Because we rely on third
party subcontractors for assembly of our products, we cannot directly control
product delivery schedules. We have experienced in the past, and may
experience in the future, product shortages or quality assurance problems that
could increase the cost of manufacturing or testing of our products. It is time
consuming and difficult to find and qualify alternative assemblers. If we are
forced to find substitute subcontractors, shipments of our products could be
delayed. Any problems associated with the delivery, quantity or cost of our
products could harm our business. Political instability in the Peoples Republic of China or Taiwan could harm
our manufacturing and research and development capabilities and negatively
impact our product sales. We operate our research and development facility in the Peoples Republic
of China. In addition, almost all of our products are manufactured and
assembled outside of the United States at facilities operated by third parties
in Taiwan. The political and economic conditions in the region, including the
Peoples Republic of Chinas dispute with Taiwan, may adversely impact our
operations including manufacture and assembly of our products and research and
development efforts. We cannot assure you that restrictive laws or policies on
the part of either the Peoples Republic of China or the United States will not
constrain our ability to operate in both countries. If we are required to
relocate our facilities, our business will be disrupted and our costs
associated with research and development will increase. 25




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If our competitors use our intellectual property and proprietary rights, our
ability to compete would be impaired. Our success depends in part upon our rights in proprietary technology and
processes that we develop and license from, and to, others. We rely on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements with our employees, consultants and strategic
partners in order to protect proprietary technologies that use our products.
We cannot assure you that these measures will provide meaningful protection for
our proprietary technologies and processes, and they do not prevent independent
third party development of competitive products. In addition, it is difficult
to monitor unauthorized use of technology, particularly in foreign countries
where laws may not protect our proprietary rights as fully as in the United
States. We currently have patent applications pending in the United States, and we
may seek additional patents in the future. Because the content of patent
applications in the United States is not publicly disclosed until the patent is
issued, applications may have been filed which relate to our products or
processes. We cannot assure you that our current patent applications or any
future patent applications will result in a patent being issued with the scope
of the claims we seek, if at all, or whether any patents we have or may receive
will be challenged or invalidated. The failure of any patents to provide
protection to our technology would make it easier for our competitors to offer
similar products. We may face intellectual property infringement claims that could be costly and
could result in the loss of proprietary rights which are necessary to our
business. Other parties may assert patent infringement claims against us, including
claims against technology that we license from others, and our products or
processes may infringe issued patents of others. Litigation is common in the
semiconductor industry and any litigation could result in significant expense
to us. Litigation would also divert the efforts of our technical and
management personnel, whether or not the litigation is determined in our favor.
Litigation could also require us to develop non-infringing technology or enter
into royalty or license agreements. These royalty or license agreements may
not be available on acceptable terms, including limitations on representations
and warranties regarding infringement and indemnification in the event of
infringement claims. Our failure or inability to develop non-infringing
technology, license the proprietary rights on a timely basis or receive
appropriate protection on licensed technology would harm our business. Regulation of our customers products may slow the process of introducing new
products and could impair our ability to compete. The Federal Communications Commission, or the FCC, has broad jurisdiction
over our target markets. Various international entities or organizations may
also regulate aspects of our business or the business of our customers.
Although our products are not directly subject to regulation by any agency, the
transmission pipes, as well as much of the equipment into which our products
are incorporated, are subject to direct government regulation. For example,
before they can be sold in the United States, advanced televisions and emerging
interactive displays must be tested and certified by Underwriters Laboratories
and meet FCC regulations. Accordingly, the effects of regulation on our
customers or the industries in which our customers operate may, in turn, harm
our business. FCC regulatory policies affecting the ability of cable operators
or telephone companies to offer certain services and other terms on which these
companies conduct their business may impede sales of our products. In addition,
our business may also be adversely affected by the imposition of tariffs,
duties and other import restrictions on systems of suppliers or by the
imposition of export restrictions on products that we sell internationally.
Changes in current laws or regulations or the imposition of new laws or
regulations in the United States or elsewhere could harm our business. 26




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and Qualitative Discussion of Market Interest Rate Risk For quantitative and qualitative disclosures about market risks affecting
us, see Item 7A Quantitative Disclosure About Market Risk of our Annual
Report on Form 10-K for the year ended March 31, 2004. Our exposure to market
risk has not changed materially since March 31, 2004. 
 ITEM 4: CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. We maintain
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act), that are
designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Our disclosure controls and procedures have been designed
to meet, and management believes that they meet, reasonable assurance
standards. Additionally, in designing disclosure controls and procedures, our
management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and procedures. The
design of any disclosure controls and procedures also is based in part upon
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Based on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer have concluded that, subject to the limitations noted above, our
disclosure controls and procedures were effective to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to them by others within those entities, particularly during the period
in which this Quarterly Report on Form 10-Q was being prepared. (b) Changes in internal controls. There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) identified in connection with the evaluation described in Item
8A(a) above that occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting. 27




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PART II: OTHER INFORMATION 
 ITEM 1: LEGAL PROCEEDINGS None 
 ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS None 
 ITEM 3: DEFAULT UPON SENIOR SECURITIES None 
 ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS On August 3, 2004, we held our 2004 Annual Meeting of Stockholders at
which our stockholders approved the following:  (a)
    
    Election of the two Class I directors to serve until the 2007
Annual Meeting of Stockholders and thereafter until the successors
are elected and qualifies: For
    
    WithheldR. David Dicioccio
    
    
    18,417,406
    
    
    
    18,400Eli Porat
    
    
    18,413,901
    
    
    
    21,905
  (b)
    
    Ratification of the appointment of PricewaterhouseCoopers LLP
as our independent registered public accounting firm for the current
year: For
    
    Against
    
    Abstain18,422,341
    
    
    
    11,500
    
    
    
    1,965
 
 ITEM 5: OTHER INFORMATION None 28




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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K  (a)
    
    Exhibits ExhibitNumber31.1
    
    Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.(b)
    
    Reports on Form 8-K
 On May 5, 2004, the Company filed a Current Report on Form 8-K to furnish
the press release issued on May 5, 2004 entitled Tvia, Inc. Reports Results
for Fourth Quarter and Year Ended March 31, 2004. 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. TVIA, INC.August 6, 2004
    
    By:
    
    /s/
    
    Arthur NguyenArthur Nguyen
Chief Financial Officer
(Principal Financial Officer and
Duly Authorized Signatory)
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CERTIFICATION Each of the undersigned hereby certifies, in accordance with 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in
his capacity as an officer of Tvia, Inc. (Tvia), that, to his knowledge, the
Quarterly Report of Tvia on Form 10-Q for the period ended June 30, 2004, fully
complies with the requirements of Section 13(a) of the Securities Exchange Act
of 1934 and that the information contained in such report fairly presents, in
all material respects, the financial condition and results of operations of
Tvia. Date: August 6, 2004
    
    By:
    
    /s/ Eli PoratEli PoratChief Executive Officer and PresidentDate: August 6, 2004
    
    By:
    
    /s/ Arthur NguyenArthur NguyenChief Financial Officer
 30




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EXHIBIT INDEX 31.1
    
    Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.